Ishiba exit triggers debt panic and leadership scramble

Japan’s bond market is cracking, and stocks are swinging after Prime Minister Shigeru Ishiba finally stepped down on Sunday. The country’s financial nerves were already frayed, but this just lit the fuse.

With Ishiba gone, investors are bracing for a chaotic week ahead. Yields on super-long government bonds were already climbing. Now, they’re exploding. The 30-year JGB yield jumped to 3.285% last week.

That’s the highest in modern memory. The 20-year hit 2.69%, not seen since 1999. That means borrowing costs for the government, and for everyone else, just got nastier.

The timing isn’t great. The Nikkei just pulled back from an all-time high of 43,876.42 it hit in August. It closed Friday at 43,018.75. Analysts expect more selling. Reuters’ latest poll puts a year-end target of 42,000.

The market knows what’s coming: more spending, bigger deficits, and looser money. And that’s scaring bondholders. Ishiba was seen as a rare voice of caution. His conservative fiscal approach kept some order. Now, that anchor is gone.

Ishiba exit triggers debt panic and leadership scramble

Ishiba’s fall didn’t happen overnight. His party, the LDP, suffered a nasty loss in July’s upper house elections. Smaller parties ran on tax cuts and more public spending. They won seats. That loss set off alarms inside Ishiba’s own team.

Internal pressure mounted for weeks. This weekend, he gave in. “I must take responsibility for the election losses,” he said. He called for an emergency leadership vote.

The finance ministry’s budget request just hit a new record, for the third straight year. Japan’s total debt now stands at nearly 250% of GDP. That’s the worst among rich countries. Traders didn’t like what they saw even before Ishiba left. Now, with no one clearly in charge, things are unraveling.

“Yields on super-long bonds will likely rise from Ishiba’s resignation,” said Katsutoshi Inadome at Sumitomo Mitsui Trust. “There has been upward pressure due to uncertainties about fiscal conditions, and the pressure will increase.” Translation: the bond market thinks the next leader will spend even more.

Nomura’s Naka Matsuzawa expects a fast reaction. “A knee-jerk reaction of the markets would be a bear-steepening of JGBs, weaker yen, and mildly higher stock prices as they see higher risks of an Abenomics-like reflationary policy,” he said.

Takaichi rises as top contender, markets eye Bank of Japan

The leadership race is already heating up. One of the frontrunners is Sanae Takaichi. She’s been loud about keeping interest rates low and pushing more spending to boost the economy. That idea makes equity investors perk up.

“If Sanae Takaichi is going to be the successor, that’s positive for the stock market as she wants to boost government spending,” said Takamasa Ikeda at GCI Asset Management.

A shift back toward something like Abe’s playbook, massive stimulus and ultra-easy monetary policy, is exactly what many in the market are now expecting. That could mean the Bank of Japan has to change course again. It’s already trying to unwind years of extreme stimulus, slowly raising rates and cutting its JGB stash. But Ishiba’s exit might derail that.

Rong Ren Goh at Eastspring Investments flagged the risk. “Market participants appear more concerned about the BOJ falling behind the curve,” he said. “So are likely to focus on the coming two policy meetings in September and October to set the tone for JGBs and the yen.”

All of this is happening while Japan’s stock market is still digesting the August rally. AI investments and hopes for better corporate governance had pushed the Nikkei to new highs. But that narrative is slipping. Now, it’s about debt. It’s about the bond market. And it’s about the central bank possibly losing control again.

Japan’s path forward depends heavily on who replaces Ishiba, how the BOJ responds, and whether investors still believe the country can manage its debt.

So far, signals aren’t great.

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